When the recession began in 2008 the accepted wisdom was that it was a global crisis of which Europe was just one element. No one is saying that any more.
While other regions have returned to sustained growth we are now in the fifth year of the deepest and longest crisis in the history of the European Union.
It has constantly evolved during this time. It was a financial crisis which became an economic crisis. It is now, undeniably, also a profound political crisis. A consistent feature of the last five years has been that events have been allowed to spiral almost out of control before action has been taken. When the immediate danger is overcome a new complacency sets.
I believe that today we are once again in a period of damaging complacency. The relative calm of the sovereign debt markets has been taken as a signal of the beginning of the end of the crisis.
Yet there is widespread, and I believe overwhelming, evidence to show that fundamental problems have not been addressed.
A series of once unthinkable steps, mainly taken by the ECB, have helped. What they have not done is give Europe either a clear path to recovery or a sustainable model for the future.
There are 27 million citizens of Europe unemployed, with youth and long-term unemployment expanding rapidly. There is only one demand which the people are making of their governments and their shared Union – action for growth. And this is something which for five years the Union has not been capable of delivering.
Economic projections are still being cut. Investment funds are to be reduced. Trust in the Union is at its lowest ever level. One member state is subject to capital controls which directly breech founding principles of the Union, while another has announced a referendum on membership.
Deadlock and delay are the defining characteristics of key decision-making bodies. What was once a Euro-crisis is now undeniably an EU-crisis.
In the face of a fundamental crisis affecting the social, economic and political foundations of the European Union all we have is a halting, incomplete and uncertain agenda. It is an agenda which shows none of the urgency and ambition which is so desperately needed.
What we absolutely do not have is an agenda for either overcoming the current recession or returning the Union to long-term growth and stability. In fact, we do not even have an acknowledgement that the Union is facing the very real and growing threat of permanent fracture and lost legitimacy.
I do not believe that the debate in this country or in the Union as a whole reflects the gravity of the facts as they are today. The debate is still well behind events and driven by positions which may have been relevant when the crisis began, but are today making a bad situation far worse.
This is a defining moment in the history of the European Union. It will either develop its role to meet the challenges of today or it will suffer from a gradual and inevitable decline – pushing Europe into a new period of destructive competition.
There are two entirely competing approaches to the Union developing. One is quite clear – it sees the Union as primarily a trade facilitation body and it wishes to roll-back or at very least limit any development in the Union’s work. The other is broadly positive to the Union but it is inherently defensive and has no clear vision of how the Union should move forward.
It is not enough to point to the achievements of the past in order to justify putting our faith in the Union. Peace and rising prosperity are historic achievements which must never be forgotten, but because a model worked in the past does not prove that it can meet the needs of today and the future.
I have no doubt that a reformed and strengthened European Union is absolutely central to securing a successful future for Ireland.
The fundamental facts of our location and size have not changed, nor has the economic reality that the only route to high employment and high living standards is for us to be part of a large block which allows us to seek both social and economic progress.
Ireland could never win a competitive race to the bottom, and the damage of participating in one could roll-back forty years of progress.
However we have to acknowledge that the Union today is not working effectively. It is not delivering for its citizens. It does not have the policies or the resources to help states overcome this recession and return to sustainable growth.
Certainly the Union has an ambitious rhetoric, but the reality is that it has a very limited field of action. It has overemphasised the important of those things it has competence in, oversight and regulation, and downplayed the role of investment.
One of the many damaging things which happened during the last thirty years is that there has not been space for what should be termed ‘critical friends’ to be heard.
This is a growing middle ground which believes the EU is flawed but wants to fix it. The terms of the discussion cannot be set by defending against the reflexive anti-European views of the extreme left and right. Today, the best hope for the future is that we as a country accept the role of a critical friend.
Ireland must renew its core policies towards the Union and accept that events require us to make choices which we have long avoided. Our gradualist and conservative approach to key issues helped us in the past, but it must now be replaced by a clear commitment to what our vision for the Union is.
With our nearest neighbour and most important trading partner pushing a destructive agenda which could lead to exit from the Union in four years’ time, and with our people demanding action for growth, we do not have room for manoeuvre or nuance. The policy of sitting on the side-lines and hoping something turns up isn’t working.
In the choice between building up the Union or tearing it down we have to take sides and we have to commit to it fully and constructively. We have to work to build alliances with others, rather than negotiate on minor points of an agenda dominated by the larger countries.
That is why I believe the time has come for a new Irish policy on Europe which sets out what our objectives are within the Union, the principles underpinning our actions and the changes we will be pushing for both immediately and over the vital next few years.
The future of Europe and Ireland’s future in Europe is too broad a topic to deal with comprehensively in a short address. Instead of trying to do that, I want to be very specific by focussing on key steps I believe need to be taken.
Next year there will be negotiations on structural changes to the Union in the context of a new treaty. The natural division is between measures which can be taken in the next year and those which will be decided after that.
As part of this I want to explain why I believe that Ireland needs to take a more assertive approach to the biggest threats to the success of the Union. In particular we have to set out very clearly where we stand on the British Tory agenda of hollowing-out the Union. We must assert strongly that we believe that the European Union is about more than a single market.
I do have some hard things to say, but let no one be in any doubt these come from a deep commitment to strengthening the Union.
Fundamentally I want the Union to once again be seen as a driver of social and economic progress for all of its citizens. It needs its supporters to be more demanding and less accepting of bad policy – to be willing to speak up when proposals are not good enough to tackle the problems they are addressed to.
Action for Recovery
Two weeks ago Mario Draghi outlined what he believes is the strategy for recovery in Europe. He referred to it as ‘confidence, credit and competitiveness’. It is actually very good summary of current policy and the problem is that it is essentially the same strategy as has been in place for the last five years.
The very discouraging decision of March’s summit on the Union’s Budget has confirmed that there will be no direct stimulus coming from Europe – in fact the opposite will be happening.
The reality is that the scope for changing this in the near future is almost zero, so we have to focus on other steps which can be taken. I believe there are four specific actions which could be taken by the Union in the coming months which would collectively have a positive impact on the economy: support for extra investment by states which can afford it, completion of the banking union, political support for the ECB’s new lender of last resort facility and a frontloading of some programmes in the new budget.
End Avoidable Austerity
The IMF has confirmed in recent weeks its new recommendation to states to avoid self-defeating cutbacks in national spending.
The evidence is accumulating all the time that a key difference between Europe and other regions which are recovering strongly is Europe’s coordinated reduction in state spending.
The United States is carrying significantly larger debt and deficit figures than Europe, yet no one doubts that their economy is in a stronger position.
There are states, such as Ireland, which have no alternative but to maintain a policy of further cutting deficits. However there are others who have significant room for maintaining spending or even increasing it.
The common policy of cutting deficits has undoubtedly made the situation worse – with most countries now missing both growth and budget targets.
In the new fiscal governance arrangements the Union has taken a stronger role in overseeing the budgets of member states. This is an on-going process which involves adopting regular statements advising states on what they should do.
The terms of the Fiscal Treaty are specific, but they are not completely inflexible in terms of the short and medium term. It is still open to the Council to support a looser fiscal regime today where the evidence is that this will make it more likely to hit the inflexible long-term targets.
Einstein defined insanity as doing the same thing and expecting a different result. Whether or not member states choose to take the advice, the Union must stop expecting universal austerity to deliver growth. It can’t and it won’t and this should be recognised immediately in the on-going fiscal oversight process.
Complete the Banking Union
The absence of a banking union to go with monetary union was at the very core of the creation of the financial crisis. Even Jacques Delors has identified it as a fundamental design flaw in the Euro.
The agreement to form a banking union was seen as impossible two years ago but it has been agreed in principle. Without this a restoration of normal credit flows within the Eurozone is impossible.
Of the core pillars of such a union, regulation, deposit insurance and a resolution regime it appears that negotiations are delivering at best a half-banking union. Without a single approach covering the whole Eurozone the basic principle of sustainable confidence in the banking system will not be achieved.
If the negotiating process goes on for too long, and if the final agreements continue to be watered down, a renewed destabilising of banks is entirely possible. We should not be willing to accept something we don’t believe delivers what is needed.
The pace of negotiations must be speeded up. It should be a permanent item on the agenda of the full Council summits until it is finalised.
Political Support for ECB
July 26th 2012 has already earned a place as one of the most significant days in the Union’s history. It was then that Mario Draghi said that the ECB would do “whatever it takes” to save the common currency.
In doing so he marked a radical departure from the rigid orthodoxies of his predecessor and immediately restored confidence in European investment markets. His move was an unequivocal success. In spite of this it continues to be the subject to regular sniping and the legal basis of the most important measure, Outright Monetary Transactions, has been challenged at senior political level.
If any part of the ECB’s new strategy were to unravel the impact would be severe. Even with these changes the Euro does not have a central bank which can support long-term growth, but it has at least stopped causing major damage.
It is surprising how few political leaders have clearly outlined their support for the ECB’s new policies and equally how its supporters have not responded to the claims that the ban on monetary financing of governments has been infringed.
I believe that there is a clear need for political leaders to address this and at least prevent any doubt about whether the ECB’s new policies are permanent.
Frontloading benefits of MMF
The Multi-annual Funding Framework Agreed in March is a step backwards for the Union. An already inadequate budget is to be cut and the sharpest cuts are to be made in areas where the Union is making the biggest impact.
I accept that the deal will not be reopened, however there are specific steps which could be taken to immediately improve its impact, or at least put off its most damaging features.
The Parliament’s demand for this year’s shortfall, not to be taken out of the Budget, should be supported. In addition, where it is possible to bring forward investment initiatives or support programmes they should be frontloaded.
Treating States Fairly
The final step which could be taken to help recovery is that the principle be adopted that all countries be treated equally and that none suffer disproportionately from the fact that current policies were absent in the first four years of the crisis.
It is incomplete but there is at least today a framework for dealing with banking collapse and sovereign debt pressures. Some countries, including Ireland, did not benefit from the new measures and were effectively left to carry an unfair burden as Europe sought to hold the line on policies now acknowledged as failed.
As the Taoiseach belatedly put it in October “Ireland was the first and only country which had a European position imposed upon it in the sense that there wasn’t the opportunity, if the government so wished, to do it their way by burning bondholders”.
These legacy issues are not some side point of little relevance, they actually go to the heart of achieving recovery and restoring popular support for the Union. There is a shared responsibility for the failures of past European policies and this has not been fully acknowledged.
The recent deal on promissory notes is progress, but it goes nowhere near meeting the justice of Ireland’s case. In fact, the entire fiscal benefit of the deal could unravel if the Central Bank of Ireland were to be forced to sell off its new holding of bonds earlier than planned.
If recovery in Ireland is to be fully underpinned then we need further movement. Specifically, the ECB should not only allow the Central Bank to hold its Irish bonds to maturity, thereby returning interest payments to the Exchequer, it should commit to returning profits on its holding of sovereign debt to each country’s Central Bank. A deal on this has already helped Greece significantly.
If these two measures were implemented Ireland’s fiscal position would have a secure improvement of over €2 billion per annum. It would also remove much potential for resentment about unfairly carrying the burden for inflexible and failed European policies of the recent past.
Together with the other initiatives I have mentioned, shows concrete and clearly positive steps which could be taken this year to actually do something to deliver on the Union’s promise of promoting growth and jobs.
Securing the long-term foundations of the UnioN
This leaves the fundamental issue of where the longer term future of the Union. I believe that there are a series of reforms which are required so that the Union can be a long-term driver of growth.
However these face the reality of both entrenched national positions and some move to actually go in the opposite direction – to marginalise the Union and effectively declare an end to its evolution. The stand-off between these opposite forces is no longer sustainable.
First what should be done?
In order to secure its long-term future as the enabler of European progress the Union must reform its economic strategies and powers. As things stand today the basic European economic model is gradually being whittled down to encouraging trade and imposing fiscal controls.
With a budget of less than 1% of overall annual income, the European Union’s spending is not a significant macroeconomic force. Where it matters is in relation to regulation.
There is no doubt that there are important areas left where freer trade enabled by uniform regulation would be a significant benefit. But this is not the same as saying that the single market agenda today is anywhere near as significant as it was in past decades.
In fact, I believe that concentration of much of the Union’s ‘hard-power’ in this area is now distorting both its image and its work. Regulatory overreach is a real concern. There is often a sense of solutions being in search of a problem to address. But a much bigger concern is that the balancing importance of supports for development and adjustment is being lost.
When the Delors Commission succeeded in reinvigorating the push for a single market the move was balanced with an understanding of the need for central help for countries. This spirit is increasingly missing and its absence handicaps the Union’s ability to play a positive role today.
The largest single market and currency union in the world has in-built stabilisers, where states receive significant transfers during hard times. It has been estimated that transfers from Washington to the states can cushion over 20% of the impact of a serious downturn.
It is the lack of any credible central EU budget that is the single most important flaw that should be addressed.
The current budget is drawn up in such a way as to maximise conflict and minimise impact. I would strongly support the adoption of a modest revenue raising capacity for the Union as an essential step towards developing a growth-enabling budget.
In the key areas of training, rural support, environmental protection and research the Union has shown that it can help build the underlying growth potential of member states. It needs the budget to do this properly.
In the negotiations on treaty changes which will begin next year I believe we should say unambiguously that we support expanding the role of the Union in areas directly related to long-term economic growth.
Specifically this would involve the expanded budget I mentioned, a reformed ECB with growth added to inflation targeting in its mandate and a strong legal underpinning for banking union. Other measures such as a genuine regulatory review process are also required, but they do not involve a treaty change.
How to Move forward?
The question is whether any of it is at all possible? We have a combination of some, but mainly Britain, who want to go in the opposite direction, and others who support the Union but are resisting contributing any more.
In response we should return to the fundamental point that the status quo is no longer tenable. The Europe Union today is not fulfilling its core economic goals and for this to change the Union itself must be changed.
Having spent nearly three decades indulging in anti-EU rhetoric and blaming the Union for real and imagined ills, the Eurosceptic establishment in Britain has brought the issue to its logical conclusion.
They are demanding that the Union either be pared back to little more than a free-trade area or they will try to bring the United Kingdom out of the Union. They have said that this process should be completed by the end of 2017.
Ireland obviously wants Britain to stay in the European Union more than any country. The question for us is what price are we willing to pay in order to keep them in?
I believe that undermining the core of the Union, stripping away the consumer and worker protections which our citizens value so much and handicapping the ability to address clear problems in the Union, would be too high a price to pay. By all means if permanently staying out of the Euro is required, or if they want to opt-out of a broader budget there are means of accommodating them, but the Union has to be about something more than trade.
Its policies cannot be allowed to be reduced to a fundamentalist implementation of the theory of comparative advantage.
It has been argued by some in London that they can leave the Union but retain full access to the single market. This is absurd.
Membership must have some distinct advantages, and the responsibilities carried by members cannot be discarded for those who opt-out.
If we allow the next four years to be dominated solely by the agenda of those seeking renationalisation of powers the opportunity cost may be very significant – we would have lost critical time in reforming the workings of the Union for those who are committed to its future.
That reform and development agenda faces many hurdles of its own. However the one thing we have learned over recent years is that countries are often willing to change fundamental positions during negotiations.
Twelve months ago in this very room I was told that a banking union and a lender of last resort facility from the ECB were unlikely to ever happen.
Ireland’s consistent policy for the last three decades has been to argue against a ‘two-speed Europe’ even if it means holding back developments we support. I do not believe we can or should sustain this position any more.
Britain has rarely been our only ally on important negotiations and we have many opportunities to develop closer coordination with other states.
If specific action is essential to fix and develop the Union then we should support it. If this means that Eurozone-specific or wider programmes are developed so be it.
The other point which has been made is what does it matter what Ireland believes, the decisions will be made elsewhere?
I completely disagree with this point. Every member state has a duty to make a constructive contribution to future policy. Standing on the side-lines doesn’t work.
Over the years Ireland has had a major and positive impact on very important decisions. Three treaties were substantially shaped during our presidencies. Some of the Union’s most successful and progressive programmes are directly traced to Irish input – for example the enormous and underappreciated contribution of Patrick Hillery to European social policy.
A more important point is that smaller members have not yet started to fully take the opportunity of the much expanded membership of the Union and the ability to develop new alliances and change the dynamic of negotiations.
When our Presidency concludes at the end of next month the government should announce a formal process to set out Ireland’s position on the future of the Union. I would like this to be an all-party affair, however at a minimum a white paper should be prepared this year and it should form the basis of our future negotiating positions.
If we want the European Union to overcome this crisis we have to play our part in helping it to develop an agenda which is ambitious and urgent. We have to be willing to re-evaluate our core European policies and to become more assertive in pushing for real reform. We must push for further immediate action and then become a consistent supporter of longer-term reform.
The scale of the problems facing the Union and its members is so big that muddling through on the basis of current policies just won’t work.
We are doing ourselves and Europe no service by standing back.